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All eyes are on Cyprus again today as local banks are due to reopen after the government announced capital control measures to prevent a flight of deposits. The ordinary investor remains cautious, with current sentiment further undermined by the Italians’ failure to form a government, and China's tightening of its oversight of that country's rural banks. Throw month-end, quarter-end, and Japanese year-end into the mix and a few fireworks are possible. With the Easter long weekend upon us most investors will want to play it safe, as liquidity becomes more of an issue across the asset classes over the next 24 hours.

Chinese authorities rattled a few investors overnight during the Asian session after banks were ordered to tighten controls over wealth management products; a popular but "opaque element in the country's shadow banking system." The China Banking Regulatory Commission is hoping to increase transparency and reduce risk. As with many new financial Chinese rules, corporations find ways to circumvent them, resulting in rules that lack bite.

Meanwhile, the 17-member single currency 'bear' is beginning to ground the scene, focusing again on elevating periphery yields. The euro bond market has received another jolt from an old foe, Italy, and its never-ending political saga. The well-documented government gridlock weighed on the demand at the mid-week Italian bond auction. In doing so, it inflated other periphery yields while the euro classic safe haven bund rallied in price along with U.S. Treasurys and UK gilts. Even the lure of higher Italian returns produced a feeble turnout at the sale of five-year bonds.

The Bank of Japan’s Big Moment

Flight to safety sees the yen holding demand into the Japanese financial year-end and despite the fact new Bank of Japan (BoJ) Governor Haruhiko Kuroda disclosed his policy plans for government-bond purchases and other easing measures yesterday. A stronger bid for U.S. Treasurys, causing the tightening of the UST/JGB spread, is putting more pressure on USD/JPY. Mideast sellers continue to favor selling the dollar through 94.00 where Japanese bids are layered for the next 50-points ahead of the highly anticipated BoJ meeting next week. Since November, investors have been positioning themselves for bold moves by the central bank under the influence of Abenomics. But what will Japanese policymakers do? Will they disappoint current position holdings once again? Or will we actually see a new era of aggressive monetary policy? The BoJ is under pressure to reverse 15 years of deflation and meet a 2% inflation target.

With the Cypriot patchwork program in progress, the market has been able to focus its attention on the weak Italian effort to form a new government after last month’s inconclusive elections. Political paralysis impedes the growth potential of any economy, making it near impossible for business to be completed.

The European Central Bank’s (ECB) pledge to do "whatever it takes to preserve the euro" has been the primary support for Italian and Spanish bonds to date – the market has been wary of aggressively selling any product in the presence of such an insurance policy. Worries persist about Spanish banks after the Cyprus "bail-in". Moreover, with an uncertain outlook for the Iberian nation’s economy and the ever-present threat of social unrest due to high youth unemployment, it’s worthwhile to note many investors are initiating new risk aversion trading strategies.

Cyprus Bail-In Sews Confusion

What's in vogue nowadays – a bailout or a bail-in? The Eurozone policymakers’ attempt to limit the fallout of the now infamous Cyprus template comments seems to be falling on deaf ears. The Cypriot bail-in mess is effectively telling uninsured Eurozone depositors to change their "savings" habits. Where are they to go exactly? What is considered safe? For now, the historical euro risk-averse sanctuary remains at the very short-end of the German yield curve. Nervous investors have also been gravitating toward the traditional safer currencies like the GBP and CHF. To that end, you might as well throw a couple of ‘Scandies’ into the mix. (Read: Norwegian krone and Swedish krona)

There is no fresh downside momentum in EUR/USD, but little bounce either. The trend of ratcheting through option barriers and corporate bids looks set to continue. The EUR/USD players are short euros and are certainly shorter than the last Commodity Futures Trading Commission report of March 15th (-EUR7.25b). Throughout the Cyprus crisis, this market has feared a squeeze, though it has not truly materialized. Why not? Is this market really not short enough? Apparently speculators were twice as short during the last two periods of a similar bearish trend at these levels. Previous reports indicate that the EUR bear was twice as short last November and a record –EUR31b short only 10 months ago. The spec shorts may be undersold, and if so, they have little to fear. Short-term movement continues to be dominated by the crosses, especially EUR/GBP and EUR/JPY selling. Outright, the important short-term target for the techies is 1.2680.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.